Google Gets Set to Take on its Partners
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Eric Schmidt, Google's (NASDAQ: GOOG) chairman, was recently spotted using the company's upcoming Moto X phone, an offering that should help Microsoft's (NASDAQ: MSFT) fortunes and frighten players like Samsung (NASDAQOTH: SSNLF).
Indeed, the first big launch of a Motorola phone since Google bought Motorola Mobility for over $12 billion in 2012 changes the dynamics in the cell phone market in a big way. While Google has repeatedly stressed that it wanted Motorola's patents, it now looks like it will be taking on all of the phone makers who have bet their future on the company's Android operating system (OS).
A Risky Move
That's a risky move for Google that takes it out of its position of neutral ally. In fact, the company's search and Android businesses historically made money by getting as many people to use them free of charge as possible. Google earned its keep by selling advertising and applications.
That's been a huge business success for the search giant, with sales going from $1.4 billion to over $50 billion over the past decade. Earnings have gone from $0.40 a share to over $32. That's incredible growth. The only problem is that new businesses aren't as profitable as the old ones, leading the profit margin to fall 10 percentage points over the last three years.
Top-line growth has hidden that decline, but the issue is notable enough to make it into the company's annual Risks list. Now that Google is shifting its model to take on the partners that have been so important in building its business, the top-line could see pressure, too, if other mobile operating systems gain in popularity. Investors need to watch margins and sales at Google and be prepared to sell if either head south.
A year ago there wasn't a notable competitor to Android other than Apple's Mobile OS. But Apple doesn't give its technology to anyone. Microsoft's, however, recently launched a new version of Windows Mobile with Nokia's Lumia acting as the showcase. The updated Windows Mobile could quickly find itself the bell of the ball as Google partners scramble to find alternatives to Android.
Microsoft's top line has been heading higher since the end of the 2007 to 2009 recession. Although new product launches took the bottom-line from about $2.70 to $2 between 2011 and 2012, growth investors should like the opportunity that Google is basically throwing in Microsoft's lap.
Second quarter earnings, which included a large write-off for the Surface tablet, has investors worried about Microsoft's mobile ambitions again. That said, the yield of around 2.6%, backed by a decade of annual dividend hikes, is still notable. Growth and income investors should take a look at this mobile alternative as Google gets set to take on its partners in the space.
Going it Alone
Than there's Samsung, whose Galaxy phones and tablets are the only true competitors to Apple's iPhone and iPad products. The only thing is that the Galaxy products use Google's Android. Unlike many phone players, Samsung has the size to build its own mobile OS.
Tizen, as the OS is called, is set to debut later this year. Although the effort is worthwhile, it's a risky bet to make at a difficult juncture for the company. Like Apple, Samsung appears to be facing a sales slowdown. Bringing out a new OS could either give it an edge or turn into a massive disaster.
The fear of a disappointment should be high on investors' minds. Microsoft's first mobile OS was horrible and had to be largely reworked. Nokia's efforts to build an OS were a total write-off, as it chose to dump the OS to partner with Microsoft for a much needed cash infusion.
Samsung's shares have been trading lower on sales concerns. Investors should probably just avoid the stock. Tizen might be the right move, but investors are being driven by emotion today and a self-made OS could turn the company's fortunes for the better or the worse. The risks are just too high.
The Biggest Fears Realized
Google stepping into the mobile phone ring is probably among the biggest fears for its partners. Now that Moto X is out of the bag, look for changes in the industry. Microsoft is likely to be a big winner as Google partners look for more OS options.
Google, meanwhile, is taking a big risk that could hinder sales at a time when its margins have been contracting. Investors should keep a close watch. Samsung is also taking a big risk by trying to build an OS on its own. Investors have already soured somewhat on the shares and this added risk won't help. Avoid the stock until its efforts to revitalize growth begin to show results.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!